Cryptocurrencies: The end of Traditional Banking or the beginning of a new dawn?

By Shrey Parikh

What is Cryptocurrency?

Have you ever wondered about cryptocurrency? What makes people talk about it,

and what has led to its popularity during this decade? The answer is as follows: A

cryptocurrency is a type of digital money or an alternative way of making payments,

and it enables people to exchange goods and services securely without involving a

third-party system.

It is a peer-to-peer network or a system that enables everyone globally to make or

receive payments. Whereas physical currencies are moved and traded in the real

world, cryptocurrency deals exist only as digital entries in an online ledger that

describes specific transactions. When you transfer cryptocurrency funds, the

transactions are recorded in a public ledger. Cryptocurrency is typically stored in

digital wallets, where the owner of the cryptocurrency has the private key to their

wallet; this setup makes it impossible for any unauthorised party to access the

wallet1

.

Cryptocurrency in the modern economy

Although it is a relatively new form of money, cryptocurrency has quickly gained

popularity and is very relevant in today's digital world. Some of the most popular

cryptocurrencies include Bitcoin, Ethereum, Tether, Binance Coin, and others.

However, the first cryptocurrency was Bitcoin, invented by Satoshi Nakamoto back in

2009 (there are various other versions explaining who was the original founder of

Bitcoin, but that discussion will be left for some other time).

There are many reasons why cryptocurrency is used. Investors use cryptocurrency

to trade in stocks both as a short-term and long-term investment strategy.

Cryptocurrency can be quite volatile in its value, so it’s usually used by high-profile

investors to aid their investing and is bought on online crypto trading platforms.

There are, of course, other ways to earn cryptocurrency, such as Bitcoin, which is

usually acquired through a process called “mining”. Large corporations generally

utilise GPU processors that are expressly designed for the purpose of Bitcoin mining

to generate revenue. The mining process involves a computer addressing a

sequence of mathematical equations to derive a hash, which can subsequently be

utilised to acquire Bitcoin as a reward. The reward for Bitcoin is reduced by half

every four years (the most recent occurrence was in April 2024, lowering it to 3.125

BTC), thereby maintaining the scarcity of Bitcoin.

Secondly, cryptocurrencies can be used as a

medium of exchange. They have revolutionised

access to financial systems, particularly for the

unbanked population. In LICs (low-income

countries), where banking infrastructure may be

weak and where banks often leverage their power

to create monopolies, cryptocurrency can be a

viable alternative. For example, in Nigeria, the use

of Bitcoin has increased because it can bypass

strict banking laws and offer more affordable

remittance services. Similarly, El Salvador's

adoption of Bitcoin as legal tender showcases its

potential to bridge financial gaps by allowing

citizens to transfer money easily and facilitate

payments through mobile apps. Cryptocurrencies

create financial inclusion for people excluded from

traditional systems by enabling participation in the

global economy.

This is one of the main reasons for concerns about cryptocurrency overtaking

traditional banking methods. This is exacerbated by cryptocurrencies' ability to

facilitate cross-border transactions at a fraction of the cost of conventional banking

systems. There’s no need to spend hours finding the best deal to send money to

friends or family in another country because cryptocurrency can do it at a fraction of

the price. This is because cryptocurrencies like Bitcoin are not owned or regulated by

any single firm or government, eliminating the need for money transfer providers

such as Western Union, which often charge high fees for cross-border transactions.

For example, platforms like Stellar and Ripple are specifically designed to optimise

cross-border payments with near-instant processing and minimal transaction fees.

This cost efficiency benefits both individuals and businesses, making international

trade more accessible.

And this is just the tip of the iceberg. There are many new opportunities for

cryptocurrencies in the future, including concepts like decentralised finance (DeFi),

smart contracts, and stablecoins. DeFi platforms allow users to invest, lend, or

borrow without intermediaries, creating an inclusive and sustainable financial

ecosystem. It is a peer-to-peer network, similar to the one used for Bitcoins, that

uses blockchain to enable businesses and individuals to transact directly with each

other without the need for an outside entity. Smart contracts, powered by Ethereum,

execute agreements automatically when predetermined conditions are met, reducing

reliance on traditional legal frameworks. Stablecoins, such as Tether (USDT) and

USD Coin (USDC), combine the benefits of cryptocurrencies with the stability of fiat

currencies, making them ideal for everyday transactions. These innovations highlight

the transformative potential of cryptocurrencies beyond simple payments.

Challenges to Traditional Banking

The biggest challenge to traditional banking from cryptocurrency lies in the fact that

cryptocurrency is decentralised, which directly challenges the core of the centralised

banking model. Traditional banks rely on centralised authorities, such as

governments, for regulation and trust, which is considered a key aspect of their

operations.

In contrast, cryptocurrencies use blockchain technology to ensure transparency and

security without intermediaries. This rapidly changing system has prompted some

banks to adapt and collaborate with governments to create solutions like Central

Bank Digital Currencies (CBDCs). These aim to combine the strengths of both

systems—the efficiency of cryptocurrencies with the stability and control of traditional

banking. For instance, China’s digital yuan exemplifies how centralisation can

coexist with blockchain technology, offering controlled yet efficient transactions.

Another reason traditional banks feel threatened by cryptocurrencies is their potential

to erode the monopoly banks hold over loans, payments, and savings. Peer-to-peer

networks bypass intermediaries, empowering individuals to transact directly.

Platforms such as Compound and Aave, for example, enable users to earn interest

or take loans without interacting with traditional banks. This shift forces banks to

reconsider their value propositions and compete in an era of evolving financial

systems.

However, cryptocurrencies have their drawbacks.

Mining bitcoin, for instance, is time-consuming and

requires considerable energy; some mining

operations use more electricity in a year than entire

countries, which raises concerns about

sustainability. The regulatory challenges are also

huge, as governments try to address issues such

as tax evasion and money laundering. Another

issue is that cryptocurrencies are very volatile,

often experiencing large changes in price, which

ultimately undermines their function of value

storage. Further complications arise in regards to

wide-scale adoption: risks like hacking and

double-spending attacks. This makes security a

very serious issue.

The Future of Cryptocurrencies and Banking

Cryptocurrencies, CBDCs, and traditional banks are likely to coexist going forward,

creating an ecosystem that is a blend of all of them. While cryptocurrencies offer

decentralisation and innovation, CBDCs provide stability and regulatory oversight.

Governments all around the world are examining regulatory systems that allow

equilibrium between financial stability and throttling innovation. For example, the

Markets in Crypto-Assets regulation of the European Union is an attempt to create a

unified code for the regulation of cryptocurrency.

In the long term, embedding blockchain technology into traditional structures can

also improve the transparency and speed of bank processes. Smart contracts may,

for example, enhance the lending approval process by speeding it up, and DeFi can

offer new investment avenues. Of course, this will only be a reality if issues of

sustainability, security, and compliance with regulatory policies are overcome.

Conclusion

To conclude this essay, I would like to share my perspective on cryptocurrency and

its potential impact on the future. I believe that if nations and governments continue

to neglect the integration of cryptocurrency into the global financial system, an

economic crash could become inevitable under specific circumstances. This

scenario would occur if two major events coincided: significant volatility in

cryptocurrency leading to a crash in the stock market, and a severe recession

caused by external forces, such as a major war, which could devalue traditional

currencies.

While this may seem dramatic, many economists argue that a recession is a natural

part of the economic cycle. However, the next one could pose unprecedented

challenges due to the factors mentioned above. If cryptocurrency remains poorly

integrated, traditional banking systems might struggle, and the collapse of major

financial institutions could trigger a domino effect across global economies.

In summary, cryptocurrency has the potential to revolutionise the future of finance,

but its integration must be handled carefully to avoid catastrophic consequences.

Governments and financial institutions need to act proactively to ensure stability

while embracing innovation.

1] “What is Cryptocurrency and How Does it Work?” Kaspersky,

https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency.

Accessed 18 November 2024.

2] Armstrong, Martin. “Chart: The Rise and Fall and Rise and Fall of Bitcoin.” Statista, 13

May 2022, https://www.statista.com/chart/24966/bitcoin-ups-and-downs/.

Accessed 18 November 2024 for the image

3] Buchholz, Katharina. “Chart: How Common is Crypto?” Statista, 17 March 2021,

https://www.statista.com/chart/18345/crypto-currency-adoption/. Accessed 18

November 2024.

4] “Gemini's Cryptopedia - Learn How Bitcoin & Other Crypto Coins Work.” Gemini,

https://www.gemini.com/cryptopedia. Accessed 18 November 2024.

5] “Regulated Stablecoin (RLUSD) Reserve for Payments.” Ripple,

https://ripple.com/solutions/stablecoin/. Accessed 18 November 2024.

6] Read more on cryptocurrency: Sharma, Rakesh, and Amilcar Chavarria. “What Is

Decentralised Finance (DeFi) and How Does It Work?” Investopedia,

https://www.investopedia.com/decentralized-finance-defi-5113835. Accessed 18